When it comes to stocks, it's easy to have a short memory. Everybody seems focused on what's happening today and the near future. What are the pundits saying about this week? What are the forecasters predicting for the next quarter?
Back in 2020, after the market shook off the shock of the pandemic, it came roaring back and major indexes like the S&P 500 ended the year at record levels.1
Going into 2021, stocks like Nordstrom and Peloton didn't just recover, but reached new highs. For some active investors it seemed like a no-brainer to load up on these companies that had figured out how to be profitable despite the pandemic, a tight labor market, and rising inflation.
But by the 4th quarter of 2021 the bloom was off the rose for many of these high profile stocks.
In late November 2021, blogging investor Michael Batnick wrote, "2020's darlings are getting absolutely annihilated. And then there is the retail wreckage that is currently going on." Companies that seemed sure bets saw their shares fall by double digits.2
Batwick observed, "Seeing this type of wreckage is the periodic reminder I personally need that stock picking is really, really hard."
This lesson is not just true for recently volatile markets. According to JP Morgan, more than 40% of all companies that were ever in the Russell 3000 Index experienced a "catastrophic stock price loss," which they defined as a 70% decline in price from peak levels which is not recovered.
That's more than 2 out of every 5. And doesn't even count those stocks that didn’t collapse but simply lost money for speculators.
Bartnick admits that picking stocks is hard, time-consuming, and emotionally exhausting. And even if you're able to outperform the market, probably not worth the huge time cost.
"Tens and hundreds of hours to maybe beat the benchmark by a few percent doesn't seem like a great trade," Batnick says. And for this reason he recommends index funds for most people.
He concludes, "I have fun playing with the market, even when I'm losing. But you can't argue with the data, and the data says that beating the market, while possible, is a game that should mostly be played for fun."
Similar to pure betting, speculating is driven by a desire for thrills. People do it to experience the exciting emotions as your picks go up or down. Just understand that the odds of you or someone you know outsmarting global markets over rest of your investing lifetime are very, very slim.
However, when saving for retirement, emotion is an impediment to reaching your long-term goal. So the prudent investor will instead try to remove emotion from his or her actions. Working with a trusted advisor, they will commit to a plan and keep doing the right things even when their feelings are urging them to take other actions.
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